Natural Gas Futures are standardized contracts with expiration dates that trade on an exchange like the New York Mercantile Exchange or the Intercontinental Exchange. One contract is equal to 10,000 million British thermal units (Btu).
North American natural gas is one of the most volatile commodities in the world. Its volatility stems from a unique demand-supply balance: demand is highly inelastic, especially during winter, while supply remains relatively fixed.
Margin Requirements
Natural gas is a major energy commodity used by millions of people around the world for heating, cooking and generating electricity. It also plays an increasing role in industrial usage and can replace petroleum and diesel as a fuel source for cars. The supply of natural gas can be impacted by seasonal changes in weather, which may cause demand to increase or decrease and can drive the prices up or down. Traders can take advantage of this volatility by trading our range of CFDs on Natural Gas futures contracts.
To trade natural gas futures, traders enter into a contract where they agree to buy or sell a specific quantity of the commodity at a specified date in the future for a certain price. To do this, traders trade on an exchange, such as the New York Mercantile Exchange (NYMEX) or Intercontinental Exchange (ICE). Each natural gas contract is for 10,000 million British thermal units (mmBtu), and each transaction is known as a lot.
Traders who buy or sell natural gas futures contracts must have enough margin to cover their positions at all times. The minimum amount required for a new position is equal to the initial margin for that particular contract multiplied by the size of the trade. Margin rates are updated daily, based on current market conditions. If your account falls below the required margin, your trades will be automatically liquidated and you will receive a margin call.
The price of a natural gas contract depends on several factors, including the weather, oil prices, and the economic health of the country in which it is traded. For example, a booming economy usually leads to increased demand for the commodity, and this can push prices up. In contrast, a weak economy can lead to lower demand, and this can cause prices to fall.
Many savvy producers and end users of natural gas hedge their price risks by buying or selling natural gas options. To understand the mechanics of these contracts, it is helpful to consider the underlying physical market. For example, the US stores natural gas in underground reserves during summer months so that it can be withdrawn for use when temperatures are colder. This can reduce the need for air conditioning, and this can help drive prices down.
Trading Hours
Natural gas futures are a type of energy derivative that represents the obligation to deliver physical quantities of natural gas at a specific point in time in the future. Traders use this instrument to hedge their exposure to changes in the supply of and demand for natural gas, as well as to speculate on the direction of natural gas prices. Natural gas futures are most actively traded on the New York Mercantile Exchange (NYMEX), although they can also be found on other exchanges such as the Intercontinental Exchange (ICE) and the Multi Commodity Exchange of India (MCX).
When trading in the natural gas market, traders are expected to follow market fundamentals including weather forecasts, production numbers, and other news events that could affect the price of the commodity. In addition, traders must keep up with the latest information on storage and inventory levels disseminated by the Energy Information Administration, an independent agency of the United States Department of Energy. This data often causes significant price volatility and can change market expectations about future supply and demand for the commodity.
The NYMEX offers several ways to trade natural gas, such as a futures contract and a spot transaction. Traders can also find the most liquidity by buying and selling natural gas options, which are similar to futures contracts but have more flexibility in terms of strike prices and expiration dates. Options are popular for speculating on the direction of futures prices. For example, if you think the price of natural gas will rise, you can buy call options. If you believe the price will fall, you can buy put options. The difference between the option’s strike price and the market price at the time of expiration is your profit.
When trading on the NYMEX, traders can find a variety of technical tools that help them develop their strategy and make sound trades. These include advanced technical indicators and overlaid charts of positively and negatively correlated assets. Using these tools can help traders identify divergences, which are powerful signals in the markets. Natural gas prices are volatile and can move up or down depending on a number of factors, from seasonality to weather conditions.
Trading Platforms
Natural gas is used for a range of purposes, from creating electricity to heating homes. It is an important source of energy, and its price can be affected by a variety of factors. For example, higher demand for the commodity can cause prices to increase, and lower supply can lead to lower prices. Additionally, the commodity can be affected by weather conditions. In the winter, people use more natural gas to heat their homes, which can create a rise in prices. Traders can speculate on the price of natural gas by buying or selling futures contracts, or CFDs.
A natural gas futures contract is an agreement to buy or sell a specified quantity of the commodity on a future date at an agreed-on price. It is a cash-settled commodity that trades on the ICE Futures Europe and CME Globex platforms. The natural gas market is volatile, so it can be a good option for traders to diversify their portfolio with this instrument.
The price of a natural gas contract is quoted in dollars per million British thermal units (BTUs). A BTU is the amount of energy it takes to raise or lower one kilogram of water by one degree Celsius. The minimum tick size for a natural gas contract is $10, meaning that the price of the commodity can move in increments of $0.001. This price movement is referred to as a “tick” and is how traders determine their profit or loss on a trade.
IG offers both futures and CFDs for trading on the natural gas market. CFDs are popular among retail traders as they provide the opportunity to speculate on the price of a commodity without taking ownership of the underlying asset. With CFDs, you can profit from an upward or downward price movement on the underlying asset, but you will need to pay a small margin for each trade.
IG’s CFD on the Henry Hub natural gas contract offers you the ability to trade this market with leveraged exposure and a low initial deposit. You can also benefit from our free charting services, allowing you to analyse the price of the commodity and develop your trading strategy.
Spreads
Natural gas is one of the most volatile publicly traded commodities. Intraday price swings of 4% are not uncommon, and monthly price changes of 15% or more are common. As a result, traders and hedge funds rely on time spreads (also known as calendar spreads) to make money in this market.
A time spread is a combination of two futures contracts with different delivery dates. When the prices of the two contracts differ by more than one month, they create a tradeable differential between the prices of the contract with the earlier delivery date and the contract with the later delivery date. A time spread allows you to profit from price differences in the energy markets without taking an outright long or short position in either of the underlying futures contracts.
The most popular time spread in the natural gas market is the spread between March and April, which reflects seasonal factors and bets on how tight supplies will be at the end of winter. This spread is so volatile that it is a question on the Series 3 exam and has earned the nickname “widow maker.” As we move into February, expect to see lots of action in this spread as the market prepares for the spring transition from withdrawal to injection season.
As more and more people in North America turn on their air conditioners for the summer, demand for natural gas will increase. In the past, this has caused prices to rise and driven inventories lower. As a result, prices in the near-term have suffered more than those for the far out months. In addition, the contracts for delivery in low-use months tend to suffer more than those in high-use months due to potential hold-up costs.
In order to hedge against the risk of rising prices for natural gas, traders can use a range of hedging strategies, including futures, swaps, call options and costless collars. However, for many companies seeking a relatively low cost, somewhat short-term hedge against the risks of higher natural gas prices, a bull call spread may be an appropriate tool.
Conclusion:
Trading natural gas futures can be a profitable endeavor for beginners who are willing to put in the time and effort to understand the market and develop a solid trading plan. This involves understanding the fundamentals of the natural gas market, monitoring supply and demand factors, staying up-to-date with industry news and events, and utilizing technical analysis tools to identify potential entry and exit points. It is also important for beginners to practice risk management strategies and start with a small trading account until they gain more experience and confidence.
FAQs:
- What are natural gas futures?
Natural gas futures are financial contracts that allow traders to buy or sell natural gas at a predetermined price and delivery date. These contracts are traded on exchanges such as the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE).
- What are some factors that can impact the natural gas market?
Factors that can impact the natural gas market include supply and demand factors, weather patterns, geopolitical events, economic data, storage levels, and regulatory changes.
- How can beginners develop a solid trading plan for natural gas futures trading?
Beginners can develop a solid trading plan for natural gas futures trading by understanding the fundamentals of the natural gas market, monitoring supply and demand factors, staying up-to-date with industry news and events, utilizing technical analysis tools, and practicing risk management strategies.
- What are some risk management strategies for beginners trading natural gas futures?
Risk management strategies for beginners trading natural gas futures can include using stop-loss orders, position sizing, and diversification of trading strategies.
- What is the minimum amount of capital needed to start trading natural gas futures?
The minimum amount of capital needed to start trading natural gas futures can vary depending on the trading platform and broker used. It is important to start with a small trading account until you gain more experience and confidence.
